In measuring Assessment of Value, and especially within non-financial factors, expect ESG to get a fair amount of air-time in UK fund boardrooms, as a possible means to spell out distinctive goals to assess value, says Frank Rittner
In a few weeks from now, the vast majority of UK authorised fund managers, with their newly constituted fund boards and – for many – with their recently appointed independent non-executive directors (iNEDs), will start the hard work of addressing several of the key issues thrown up by the Financial Conduct Authority’s (FCA’s) Asset Management Market Study (AMMS).
Better governance, greater transparency and assessing value are all key deliverables of the AMMS, but the most immediate focus is going to be on the Assessment of Value (AoV) piece, and within the non-financial indicators under review, it will come as no greater surprise that ESG (Environmental, Social & Governance) factors are likely to get a fair amount of air-time as a possible means to spell out distinctive goals. In fact, I would suggest that tangible ESG performance claims could emerge as one of the most effective ways to rebut the concern that value, in the round, is not sufficiently demonstrated.
There is a plethora of shades of green. The mushrooming of ethical investment opportunities and corresponding private ESG standards are impressive; and yet for retail investors, this is a double-edged sword, as sustainable investment choices get more complex, and often outright confusing. And they are not the only ones finding it hard. Even professional investors and fund buyers, who ought to be far more attuned to these issues, say that as one gets beyond the obvious screening of so-called “sin-stocks”, as they are still rather quaintly referred to, the situation quickly becomes fuzzy, revealing weaknesses of the current ESG investment schemes.
You can’t manage what you can’t measure
To turn ESG labelling into more than a beauty contest and to empower fund clients to make truly effective investment choices, a closer look is required into how chosen portfolio companies compare against “baseline” ESG benchmarks. The question: “What incremental benefits are truly being offered?” needs to be answered. To enhance the value of ESG criteria as investment guides, it appears to be necessary to weed out those that go only skin deep.
Asset managers referring to ESG in their value propositions aim to set themselves apart by claiming performance “beyond compliance”. Against the backdrop of tightened laws, already requiring investee companies to comply with a multitude of ESG rules, these assertions often lack convincing substantiation. All this at a time when the government in the UK claims global sustainability leadership by enshrining a 2050 net zero GHG (greenhouse gas) commitment in national law, proliferating soft ESG badges attached to mutual funds and other investment products deserve scrutiny. The question is: what additional values do they really exhibit, and more to the point, how do you measure them?
According to some fund managers, the sprawling diversity of the ESG palate may present a pretty bouquet, but is proving ineffective, as it allows each investor to pick one or a few pleasing flowers according to their individual preference. And yet rational investors are getting frustrated, as they start seeking benchmarks or third-party ratings that facilitate an objective comparison of different products.
More to be done
So far, not much has been done to harmonise ESG related disclosures, even as efforts to enhance transparency are gaining momentum. Notable amongst them is the work done of the Swiss CFA Society, the EU’s Eco Label, and the private efforts of the Lichtenstein-based CSSP (see below for links to all three). And yet this may not be enough, especially in view of the UK government’s net-zero carbon commitment, which suggests that the measurement of carbon foot-print is bound to become a key ESG indicator.
But let’s bring the discussion back to where we started. The fact that ESG, in all its facets, is already a hugely important factor and has multiple applications in the world of asset management today is beyond reproach. What is also increasingly clear to me is that as fund boards in the UK, and indeed elsewhere in Europe, start to measure the value they provide to their investors, the appropriate impact of ESG is their evaluation is only going to grow – and this is going to have serious implications for the entire fund boards: the chair, the executives and especially the iNEDs. Are you ready?
Frank Rittner, an FBC member, is a managing partner and board director with several Swiss-based investment companies, including Q.C.A. AG and Climate Protection Invest AG. Previously he served as Portfolio Manager at the Global Environment Facility, one of the largest independently managed investment funds of the World Bank. He can be contacted at FR@QCA.CH
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